Back on February 19, as it became apparent that a mysterious virus in China had begun reaching across the globe, I named Netflix (NFLX) “The Best Coronavirus Stock”. At that time, I wrote to my investment subscribers at Cabot Undervalued Stocks Advisor:
“Want a stock that’s probably going to gain customers during this virus epidemic? Look no further than Netflix (NFLX) … There are tens of millions of people in China and surrounding countries that are quarantined, or simply voluntarily avoiding public places. What are they going to do with their time? My guess is that a significant amount of movie-watching will be taking place, with lots of folks signing up for Netflix – an internet commodity that can’t be constrained by a human virus.”
Fast forward to the afternoon of April 21, when Netflix reported first-quarter earnings results. The big, celebrated number was the 15.8 million new subscribers, far surpassing Wall Street’s expectation of 8 million new subscribers. It appears that movie-watching was a far more popular activity during this quarantine season than even the experts had predicted!
Within the earnings press release, the balance sheet numbers were preceded by a lengthy letter addressed to shareholders. The letter discusses:
- the fortunate but unsustainable surge in new subscribers;
- the customer support issues arising from work-at-home challenges, which the company has resolved;
- 2,000 new hires in customer service;
- the almost complete cessation of film production;
- a $150 million donation to provide income to out-of-work television production cast, crew and support personnel, which includes setting up hardship funds for unemployed industry personnel in seven countries in Europe, Central & South America;
- the company has doubled its own match to their employees’ charitable giving.
Netflix management also delivered surprisingly high forecasts for the second quarter, including an expectation of $1.81 diluted earnings per share, when the analysts’ consensus estimate was only $1.55. This earnings projection nails down the answer to the question, “How is the outlook for Netflix, going forward?” Between the outstanding first-quarter subscriber growth and the continued rising operating margins that are enhancing profits, investors should remain confident about owning this superb growth stock.
Ignore the Headlines; Netflix is in it to Win it
You’re going to read negative headlines that announce that coming quarters will not be as strong as Netflix’s first quarter, as COVID-19 fades from the scene. Well, it didn’t take a rocket scientist to figure that out, but the news stories will present that as a bad situation, as in, “Oh no, will Netflix become a mediocre company after the virus is gone?!” Sigh. Ignore the headlines, which are meant to scare people into tuning in to that particular news medium. Instead, focus on Netflix’s second-quarter projections, which are outstanding, and read the press release, which is informative.
By the way, I’ve noticed that investors love to complain about some of the really popular stocks, in a sneering manner, with the implication that these companies are on the downtrend in terms of product popularity and balance sheet performance. All you’ve had to do in the last couple of years is go on Twitter and write, “What do you think of Apple (AAPL) stock?”, and the naysayers come out of the woodwork. You can tell that they’re mostly people who are desperate for attention and want to project a superiority over Apple, or Netflix, or whichever company is their target du jour. I’ve even had several investors seriously question me, in recent days, about Netflix’ viability as a growing company!
I’ll control my reaction here … they’re out of their minds. If an investor wants to feel superior to a company, then perhaps they should start by insulting a company that’s losing money. But picking a fight on social media over Apple or Netflix earns them a scarlet L sewn onto their shirtfront … L for “loser”.
So if you’re at a cocktail party and you mention Netflix stock, and Mr. Suave-and-Debonair insults the company as if he has some sort of serious inside information about its impending demise, just smile, knowing that he’s not a terribly happy or confident person. Happy people don’t insult smart people who own shares of NFLX.
I expect 2020 to present difficult moments for U.S. stock investors as the economic impact of the global quarantines continues to deliver waves of bad news. Despite this year’s stock market turmoil, Netflix shares rose to all-time highs.
However, no stock is impervious to trauma in the broader stock market. Accumulate NFLX during pullbacks. Buying low is an investor’s best revenge.